Planet Money’s The Indicator

Planet Money is one of my favorite podcasts that I listen to. They talk about money, economics and financial related news tidbits. They recently spun off a mini-podcast called The Indicator which does a deep dive into one particular aspect in Planet Money that they think deserves a more thorough analysis. Recently they put out a podcast talking about the Beige Report (wiki). I had no idea there was such a report that is put out by the Federal Reserve. Nonetheless, the reporters at Planet Money did their best to humor and enlighten the significance of the report with three snippets. The full transcript of the snippet can be found here. Below is the snippet that I found most interesting.

SMITH: And Boston had this great aha moment for us that they wrote about in “The Beige Book” which might explain why wages have been rising so slowly even though unemployment is so low across the nation and in Boston.

VANEK SMITH: And this is a big economic mystery that everybody’s talking about right now. I mean, unemployment’s so low people are trying to hire like crazy, and that could help be explained by this moment in “The Beige Book.” They’re talking about a manufacturing company. And they say, quote, “another industrial firm had 20 unfilled openings in a plant with a hundred employees and said they were making up for it with significant overtime. When asked why they didn’t increase wages to fill the openings, the contact said they would have to pay all the existing workers more, which would be uneconomic.”

SMITH: So they’re making everybody work overtime…

VANEK SMITH: Yeah.

SMITH: …Because they’re afraid of giving everyone a raise. So they can’t raise wages on just the new people that they desperately need.

VANEK SMITH: Yes, exactly.

SMITH: Which is fascinating because, I mean, this is something that data doesn’t often capture. We like to think that there’s this direct relationship between wages and employment. But of course there’s all these weird things in the economy – contracts and special cases…

VANEK SMITH: And office politics.

SMITH: …And office politics that just makes it hard to give new people raises.

After hearing the episode, I’m a bit shocked at the rationale. Why would hiring new workers who would have higher wages force a company to give everyone a raise? That reasoning doesn’t make sense to me. And more importantly, wouldn’t that just mean the wages you’re paying now are actually not high enough?